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Day of days for Venezuela

A background and analysis of events in Venezuela leading up to the election last Sunday

Day of days for Venezuela August 1, 2017Leave a comment

Sundays election in Venezuela was marred by violence across the country. Polling day saw the army and police deployed on the streets throughout the country and the BBC reports at least 10 shot dead. The country is deeply unhappy with the course of events and on the road to mass unrest and some suggest, Civil War.

Given that Venezuela has the the worlds largest proven oil reserves the current state of affairs is the result of mismanagement and the greed of the countries elite.

An unpopular election

On Sunday the 30th July national elections were held to vote in members of a ‘constitutional assembly’. This will replace parliament and re-write the countries constitution. The elections went ahead amid protests at home and widespread criticism from many countries all around the globe. The new assembly has since stripped members of the opposition in Congress of all their powers and the move certainly bears all the hallmarks of a seizure of absolute power.

After months of protests the skies have further darkened over Caracas as the Venezuelan people and the world alike look for the way back.

President accused of undermining democracy

Nicolas Maduro was appointed interim president following the death of Hugo Chavez in March 2013. He narrowly one a Presidential election in April 2014 and has since sidelined parliament and ruled dictatorially by decree.

The government in the capital, Caracas, claims 41% of those eligible cast a vote, some 8.1 million people. The opposition however claims a far lower turnout of around 15% and alleges electoral fraud. It points for example to the lack of indelible ink used to mark a finger once a vote is cast. This basic and common practice is a cheap and effective counter to electoral fraud. Taxi drivers in downtown Caracas support the opposition view, Humberto Pelaez cast a vote himself but said the turnout was poor in comparison to previous years.

Opposition leaders have accused the President of undermining democracy and seeking to legislate so that he may stay in power beyond the end of his term in 2019. Mr Maduro’s predecessor, Hugo Chavez, also rewrote the constitution but did so following a referendum and repeated demonstrations of support for the move.

Lack of opposition

One issue is no that there is no effective opponent to Maduro and his communist United Socialist Party of Venezuela. The opposition is weak, splintered and lacks organisation and leadership, though does retain the support of the largest of the countries trade unions. The populace in general are at breaking point following years of shortages of the most basic food and medical provisions. Inflation is in the hundreds of percent pushing prices ever upwards as people battle to find work of any kind at all.

The country has been at boiling point for some time as a result of a collapsing economy, a lack of jobs and falling living standards. These elections mark a new low. The government has banned demonstrations and protesters have been clashing with government forces for months, resulting in hundreds of deaths.

Crisis and migration

A statement often rolled out in criticism of communists, perhaps unfairly, is that first they wreck the economy, then ban the opposition and then start shooting the people. True or not, Venezuela is currently doing nothing to belay this statement. Venezuela is now a failed state, the IMF reported last year the the country had the worlds worst economic growth, the worst inflation and one of the highest murder rates. Nothing has improved since then. Progress made in the 2000’s has been reversed, citizens have to queue for hours for everything and law and order has disintegrated.

For some time now those who are able to leave the country have been doing so. Thousands of Venezuelans are fleeing, Columbia and Brazil being the main destinations. Columbia has imposed restrictions and has deported small numbers back to Venezuela. Brazil’s borders remain open however, and it is possible for Venezuelans to buy a residence permit for $96, though even this is a struggle for many of Venezuela’s poorest.

Despite enormous natural resources the country is incapable of harnessing this intrinsic wealth. This tragedy is one that Venezuela shares with many others, The Democratic Republic of Congo being a good example. Venezuela has the largest oil reserves in the world, Saudi Arabia coming in a close second, both are members of the OPEC cartel. The two countries have more or less the same population (+ or – 1m) of around 31 million people. Yet the contrast is simply staggering with per capita income just a third of Saudi Arabia.

The rise of Chavez

In the early 1990’s a glut of oil in world markets saw the price fall as low as $11 a barrel. Venezuela struggled and inflation rose as high as 100% in 1996. Colonel Hugo Chavez led two attempted coups at a time of martial law, rioting and strikes in protest at economic hardship. Having served two years in prison for his efforts, he rose again and this time the public democratically elected him as President in 1999. He promised reform, spoke of a Bolivarian Revolution and set up missions to help the poor.

For a time everything went to plan and his supporters, fiercely loyal ‘Chavistas’ proclaimed victory for the country in its fight against corruption. The oil price rose and rose, peaking in 2008, and with cash flooding into the country living standards improved dramatically. Sadly a combination of Chavez’s ill health and a collapse in the oil price meant that the petro dollars ran out just as the world tipped into the financial crisis of 2008.

And then the fall

The state owned oil company, Petróleos de Venezuela (PDVSA) once enjoyed a high level of expertise amongst senior managers. As Chavez’ health failed he replaced those in crucial posts with others on whom he could guarantee on loyalty. As the expertise walked out of the door investment in the oil fields and infrastructure fell and corruption rose.

The PDVSA failed to buy in the equipment and expertise from abroad which would secure the means of production and whilst the Venezuelans can get the crude oil out of the ground they are incapable of refining it into an exportable product in any volume. The underinvestment in the oil industry has brought about a paradox. Venezuela actually imports a light crude oil to use in the processing of its heavy crude. Together with a collapsing oil price this meant the country’s coffer’s ran dry.

And the government didn’t just want to control the powerful oil industry, it wanted hands on control of every business in a classic, Soviet style, ‘command economy’. One of the problems with government officials deciding who gets money and what they do with it is that all too often they decide that a large portion should be allocated to themselves and it rapidly leaves the country to nestle in a tax haven offshore.

Unconfirmed estimates put embezzlement by government officials at perhaps $300 billion over the past decade. This has not just made a few hundred very rich, but tens of millions very poor.

Slide into financial chaos

As a result of the currency crisis and rampant inflation, the country’s bonds are also under pressure and have fallen dramatically in price. The yield now implies a greater than 60% chance of default next year. Without the ability to issue sovereign debt Venezuela has far less control over its finances.

In 2014 Venezuela borrowed $55 billion from China and Russia, on the basis it repaid in oil. The slide into chaos is slowly removing its means to do so. Unpaid shipping and maintenance fees prevent tankers from sailing. And the situation gets messier still. PDVSA owns a US, Houston based refiner and used it as collateral against loans from Russia’s Rosneft oil and gas company. It seems likely that the PDVSA has defaulted on the loans and in theory Rosneft and hence Russia could now take charge of the controlling stake in the refiner. This would not sit well with the US Administration.

The Future

Although President Maduro is defiant, he faces real challenges in the days and weeks ahead. Those of governability and credibility. No one recognises the legitimacy of the election result, not the Venezuelan people nor its Central American neighbours now the US nor the European Union.

Many are predicting civil war. This does seems extreme though, given that traditionally for a civil war two opposing sides are pitted against each other and the government simply does not have any popular support.

Direct intervention by foreign powers is also unlikely, most countries being unwilling to interfere with another states internal affairs. The US, UK and France’s foreign expeditions in the Middle East and Libya have failed to bring stability to these regions.

A benign military coup is possible, and perhaps preferable, provided the military return the country to democracy. The last attempt was in 2002 when Hugo Chavez was forced from power for just 48 hours. Last month grenades were dropped into the Supreme Court in Caracas by helicopter, through it now appears the helicopter was stolen.

US sanctions President Maduro

It is certainly in the interests of the US and those countries in the region to help solve the crisis. On Monday the US sanctioned President Maduro himself. In this highly unusual move the Presidents US assets will be seized and no individual or company in the US will be able to conduct any relations, business or otherwise with him. This is a clear and direct assault on the President’s credibility as a leader, and the US designed it as such.

The White House is also threatening to stem the flow of US dollars to Venezuela. The US currently buys around one third of Venezuelan oil exports and pays cash. This would be disastrous, it is difficult to see how compounding the countries economic problems will help anyone or bring about stability.

Venezuela desperately needs to do a deal on its debt to ward off default, in return for opening its markets to foreign investment and diversifying its economy. The will to help is there, from the US and Brazil in particular, but it requires the new regime to play ball.

Having brushed off criticism to date, one imagines the President Maduro will remain defiant, he said last week, “We will stand firm and never kneel down”.

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